Connecticut’s largest corporations have accumulated hundreds of millions of dollars in unused research and development tax credits that could be used to spur an economic revival in the state, according to some local experts.
East Hartford developer Dan Matos and economist Fred Carstensen have been touting a legislative proposal that would allow corporations to use $1 billion in already earned R&D tax credits on capital improvement projects in Connecticut.
The proposal represents one of the most sweeping economic development plans pitched this year, and could potentially create as many as 40,000 new jobs and $2 billion in tax revenue over the next decade.
The goal, Matos said, is to get companies from Connecticut’s largest industries — pharmaceutical, high-tech manufacturing, biotechnology, and insurance — to expand and invest in Connecticut, rather than move jobs out-of-state and overseas.
“If we allow companies to spend the tax credits that they earned now, it would move the employment needle in the positive direction, and anchor those companies in Connecticut,” Matos said.
But some economic development experts remain skeptical on the idea, especially investing state dollars into things like new office towers at a time when vacancy rates remain high.
In downtown Hartford alone, several high profile office buildings, including the Metro Center and CityPlace II, are in foreclosure, and another, Connecticut River Plaza, will soon be completely empty. Just last week, the Hartford Business Journal reported that Bank of America will be vacating 200,000 square feet at its office tower on 777 Main St., to lease half as much space at CityPlace I.
“The monetization of tax credits is worth considering if they are used for the right purpose, and if it’s the right fiscal climate,” said Joan McDonald, commissioner of the Department of Community and Economic Development. “But we still don’t know the full impact of the commercial real estate market.”
State Reps. Henry Genga and Jason Rojas, both Democrats from East Hartford, co-sponsored the bill.
Under the plan, the state would pay out $1 billion dollars in outstanding R&D tax credits over a five-year period starting in 2013. In exchange, Connecticut companies that receive those credits would have to invest an additional $1 billion dollars over the next 30 months in capital projects, including plant and office space construction, and qualified equipment and machinery purchases.
Current holders of R&D tax credits would be required to make qualifying investments before Dec. 31, 2012.
Corporations would also be given flexibility in how to spend the tax credits, Matos said.
United Technologies, for example, could use them to build power plants to reduce its long term energy costs. General Electric could use its unused credits to build a biotech or medical technology facility in Fairfield County.
Both projects would lead to construction jobs and make the companies more likely stay and add workers in the state, Matos said.
According to the Connecticut Center for Economic Analysis, which is directed by Carstensen, the proposal would lead to the construction of about 4 million square feet of new class A offices, laboratories, and advanced manufacturing facilities, directly employing more than 16,000 workers.
By 2013 the total employment impact would exceed 36,000, and by 2020, 40,000 new jobs would be created, the study said.
Matos said the investments would help reverse a 20-year old trend of steady deterioration in the state’s job quality, with high-skill, high-wage jobs being replaced broadly with low-skill, low-wage jobs.
Rep. Cameron Staples, co-chair of the finance committee, said the proposal is intriguing but likely won’t be passed this session because the state doesn’t have the money to make the investment.
“If we were in different economic times and we could afford to do something like this, it would be a very interesting idea,” said Staples, a Democrat from New Haven. “We don’t have a billion dollars to invest. We have to limit the amount of tax credits we allocate because of the budget constraints.”
The tax credits are already on the books of the companies, but the state has not set aside the full amount of money to cover the credits, Staples said.
Carstensen does not buy Staples’s argument, saying the plan is self funding and will actually generate a net revenue gain for the state. Business activity from the capital investments would generate about $1.8 billion tax revenues, the Connecticut Center for Economic Analysis report said.
As a result “adopting the policy creates no burden on Connecticut taxpayers, while the companies are able to access their R&D tax credits, which they earned in good faith,” Carstensen said.
Matos said the legislation is not the answer to all of the state’s problems, but it would buy some time to get its fiscal house in order.
More importantly, the plan would show that Connecticut supports its largest companies, and could help the state shed its business unfriendly reputation.
The accumulation in R&D tax credits by Connecticut companies is not being done by their own choosing, Matos said. Over the last 10 years, he said, lawmakers have put limitations on them, to a point, where companies are essentially unable to use them to any meaningful degree.
Companies, for example, can’t use the credits to offset more than 70 percent of their corporate income tax burden each year.
In 2007 alone Connecticut companies had $1.3 billion in unused research and development tax credits, according the Department of Revenue Services.
“Denying companies avenues to use credits they have earned in good faith directly undermines the state’s long-term economic health and diminishes the credibility of any economic development strategy,” Matos said.